Sharp offersA “sharp offer” is also referred to as a “relative bid“. What this means is that the real estate purchase contract either does not have a specific price listed as the offering amount, or elsewhere in the contract there’s a clause that accelerates the price automatically based on other bids received by the home seller.  Often there is a cap to the amount the buyer is willing to pay.

Here’s one way that it could work:  a property gets, say, 20 offers.  The buyer who writes a relative bid puts into the contract that his or her offer will go to $5,000 more than the highest priced offer.  It could be any dollar amount or even a percentage.

Why would anyone in Silicon Valley or elsewhere even think of doing such a thing?

When the market gets very badly overheated, with lack of inventory, multiple offers, bidding wars and steeply rising prices on the pending and closed sales, some buyers begin to feel very desperate.  Not satisfied with simply giving up all of their contractual rights, they also give up their right to chose the ultimate sales price – more or less.

What are the risks involved with a sharp offer?

In addition to the obvious risks, an offer without a price may not be enforceable – it may not really be a contract at all because a contract must be specific to be binding.  Why should a seller take a non-binding, or possibly non-binding, offer?  Even emotionally, if the buyer doesn’t really know the price that he or she is offering, it’s about as solid as someone who’s writing a blind offer – they don’t really know what they are doing!

Here’s another reason why this is a stupid thing to do: sometimes the highest priced offer has the worst terms.  So if the offers are all in something of a pack or price band, but one has spiked it because it’s got terrible terms (such as a contingency on a home selling or an FHA backed offer with a tiny down payment), the buyer with the relative bid is subjecting the sales price paid to an offer which may never have had a chance in the first place.   It’s never just price – but price and terms that count.

For both home buyers and home sellers, we do not recommend using this strategy for home sales.  There are a myriad of ways it can backfire.

Right now there are many foolish, dangerous things happening in our local market.  In the past, relative bids or sharp offers have been a part of the mix.  I am not hearing of any happening at the moment, and I hope it stays that way, but it’s possible that it, too, will make a return in this period of madness.